Author Topic: Fair Tax now?  (Read 2544 times)

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Offline Narei Mooncatt

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Fair Tax now?
« on: June 14, 2010, 10:08:20 pm »
I've been intrigued by the fair tax movement for a while and today I listened to the audible book about it by Neal Boortz while I was driving. I heard that Fox Business Network (one of Fox News' sister stations, not Fox News itself) is going to be doing a special on it next weekend, and picked up a copy of the audible book to listen on the road, and may pick up the sequel. Anyone else here follow it and have any opinions on the Fair Tax proposals?

For those that may not know what it is, I'll give a simplified quick explanation. Though it's pretty simple to begin with. It works on the known fact that corporations don't pay any taxes and there's roughly a 22% imbedded tax on everything we buy. That would be all the "coporate" taxes and such that are built in to the cost of goods and passed down the supply chain until we, the end consumer, buy it at the retail level. With the Fair Tax, the IRS is abolished completely. No more federal income tax, medicare, and social security taxes are taken from your paycheck. It doesn't address state and local taxes but they expect them to soon follow on their own if it happens on a federal level. If you make $1000/wk, Uncle Sam would not see a penny. This also means all those imbedded taxes vanish, resulting in about a 22% price reduction.

Now, they institute an inclusive 23% sales tax. By being inclusive, it means that if the price tag shows something for $100, you pay $100. $77 goes to the sale of the product, $23 would go to the federal government. Disregarding any state and local taxes that may be added after the price of the product (i.e. exclusive tax), what you see is what you pay. Since the consumption 23% tax is about the same as the former imbedded tax, most prices will become a wash but some may actually be cheaper in some situations due to their current tax structure. Everyone, even government will have to pay this tax. The plan pays no special favors to anyone, but it's only at the retail level and everything only taxed once. Plus, since you have no federal income tax witheld, you also have more money to spend, save, and invest. Also makes us very competitive to coporations and expected to be an economic boom and will also collect federal taxes from foreign visitors since our current structure doesn't tax them directly.

Business to business transactions will not be taxed, and neither will second hand goods. As they said, everything is only taxed once, so you don't pay it when you buy used (I.E. cars, houses, clothing, etc). Also, the planners feel no one should have to pay taxes on basic living expenses up to the poverty line. So each family will receive a monthly prebate from the government equal to the amount of tax they would pay if they were on the poverty line. Doesn't matter if you're the lowest or highest wage earner, you get the prebate (paid up front, as opposed to a rebate that pays you after like a tax refund). This actually works out better for the lower classes since this will be a larger percentage of their income than for the rich people.

That's about it in a nutshell.

And to top it all off, think of the time and money you'll save not having to do your federal (and hopefully state) taxes each year. :D

*EDIT* Oh, and this is not supposed to be a tax cut. It's a tax replacement program. The 23% tax proposed is what was needed to make it revenue neutral so the federal goverment receives the same amount. It's just a more fair and simplified way of collecting it. Actual tax cutting, spending reforms, etc are another battle for another day. Not this proposal.
« Last Edit: June 14, 2010, 11:12:23 pm by Narei Mooncatt »
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Offline Yip

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Re: Fari Tax now?
« Reply #1 on: June 14, 2010, 11:01:56 pm »
Yes! Tax the Faries!!   wait... oh.

As a resident of Washington state, which does not have income tax but only sales tax, I would say that its nice not having to fill out tax forms for that. Not that my tax forms are usually that complex anyway.

Offline Narei Mooncatt

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Re: Fair Tax now?
« Reply #2 on: June 14, 2010, 11:07:01 pm »
Hehe, yeah tax faries would be awesome. Fixed the title. Sucks getting used to a different keyboard. >.<

I used to live in Texas which also only had state sales tax and not income. I miss those days. Especially with being on the truck. I'd often be outside of Tx and most other state sales taxes are lower when they have income taxes. Best of both worlds. lol
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Offline redyoshi49q

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Re: Fari Tax now?
« Reply #3 on: June 14, 2010, 11:23:50 pm »
Sounds interesting.  This seems a lot like the Flat tax, yet different primarily in the fact that the tax occurs when the paycheck is spent instead of when it is received.

There are a couple of things that pop out at me about this:

  • The concept of a simple taxing method is appealing.  Simply by existing, it would eliminate a great deal of the extra manpower that is needed simply to pay taxes.  Also, since taxes would no longer be easy to avoid, it would also reduce the manpower used to evade taxes.  The result would be a higher average standard of living (money that went to figuring out how to pay/avoid taxes would go to desired goods/services instead because taxes are easy/unavoidable).
  • I don't see how services play into this.  A post-industrial society such as the United States will have a lot of service based industries (lawyers, barbers, tech support, etc.).  Are these services not taxed?
  • I don't see investments playing into this, either.  On one hand, not taxing investments would increase motivation to invest, which would in turn boost economic activity, but on the other hand, it feels like a setup like this might increase the propensity of "bubbles".  (I'll try to figure out/explain why I feel like this might be the case when I'm awake enough to think straight.)
  • I know very little about how much money the government receives currently, but 23% seems high in comparison to both what the government currently collects and to what the government actually needs..  Is it correct that a typical household gets taxed about 6% of its paycheck by its employers, an equal amount (6%) by the individual, and then about 7% in sales tax (a total of about 19%)?  If I remembered those numbers correctly, that 23% might need to be adjusted.
  • The prebate idea (which seems to work like a negative income tax) seems appealing as a means to help the poor, but it does have a side effect.  Under a system in which a prebate exists, some individuals might find it worthwhile to not work, instead living on prebate checks.  What follows is the question: "Is this drain on the system that results from such people worth the help that the system gives to those who genuinely need it?"  Also, how high could the prebate be before it starts to hurt more than it helps?  How high of a prebate could the country afford?

Though it might not seem like it from the list above, I am in favor of a simple, single rate tax like the one this thread is about.  I also happen to be a bit of a devil's advocate, even for my own opinions.
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Offline CiceroKit

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Re: Fair Tax now?
« Reply #4 on: June 15, 2010, 12:14:40 am »
The Fair Tax idea has always seemed tempting, seemed to make sense. Then I went back to school, specializing in marketing. When all of our taxes are comprised by sales tax, then we must look at consumption and who the consumers are. Marketers know exactly who buys the most stuff. It is the middle class, but most of all, it is young families. Families with dependent children. In those first years, raising a child is very expensive, but the costs only go up (just wait until they are teenagers!), and so, those families who consume the most would be paying the most taxes.

The very poor tend to only buy what they absolutely need and often buy second hand, so this could mean lower taxes for them. The very rich already have what they want or need, for the most part, so this also means less taxes for them. Therefore, I believe it is fair to say that this would place the greatest burden on our middle class. A bit more like the status quo than what it appears to be at first glance.

The middle class is the backbone of our commerce, our economy. We need to find a way to alleviate the tax burden on them. The only way I see that happening is to shift more of the tax burden back to things like capital gains tax and estate tax that target the wealthiest of the wealthy. I know that no one likes to pay income tax, but so far, it is the fairest tax we pay in. Property tax, which by the sounds of things, would be largely unaffected by the Fair Tax (since it is a state/local tax), is probably the least fair. It seems like it shouldn't be that way, since someone with more property should pay more tax, but say you have a vacation home in another state. You spend just enough days at that residence where you are not seen as a resident and therefore not required to pay property taxes into that state. If your main residence carries a lower property tax, well then, congratulations! You have beat the system! And it is not uncommon. Oprah does it, after all. Meanwhile, in many of the most densely populated areas, where the most people live and work, property taxes tend to be higher. So much for the wealthy paying their fair share of the property tax burden.

Then again, I am biased. My house is in a commercially zoned area (it used to be residential until someone bought up most of the houses for office space) and therefore carries some pretty steep taxes. In fact, if I take into consideration income tax rebates and the fact that groceries are not taxed in Wisconsin, I can honestly say that most of the taxes I pay in are property taxes. It is enough to discourage an ownership society. The real kicker is that most of the money from property taxes goes to pay for public schools, something that I no longer have use for since I will never have children.

I don't mean to rag on property taxes too much though. Despite the fact that I will never have kids, I still want the best education possible for children everywhere. After all, they are the ones who will be taking care of me in the nursing home someday. So I will happily (or not so happily, really doesn't matter) pay my property taxes while calling for more responsible spending by my local school district.

To sum up, I would just like to say, no matter how it is assessed, taxes are taxes. If you sat down and did a comparison, I think you would find that there is little difference in the amount paid in, regardless of how the taxation is dispersed. I admit, not having to do my taxes would be nice, but then again, doing my taxes myself, without using a computer or calculator (yes, old school), helps keep my math skills sharp. I guess I would say it is something good for me, even if it is something I do not want to do.

In most peoples' minds, there will never be a good tax. However, taxes are necessary in order for us to have roads to travel on, police and fire fighters, public schools, libraries, parks and so on and so forth. When I travel a road that doesn't ruin my car, visit a library, need to report a drunk passed out on my sidewalk to the police - any of that - I appreciate what I am getting for my relatively small investment. I only hope my 401k pays out as well.
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Offline Narei Mooncatt

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Re: Fair Tax now?
« Reply #5 on: June 15, 2010, 12:18:19 am »
Quote
I don't see how services play into this.  A post-industrial society such as the United States will have a lot of service based industries (lawyers, barbers, tech support, etc.).  Are these services not taxed?
Yes, services will be taxed. In the book, they cited an example where a group of doctors were listening to a presentation about it and one complained that they'd now have to play tax man. The presenter basically told her "What makes you so special". As they said through out the book, the fair tax treats everyone the same, so services will be taxed at the retail level too.

Quote
I don't see investments playing into this, either.  On one hand, not taxing investments would increase motivation to invest, which would in turn boost economic activity, but on the other hand, it feels like a setup like this might increase the propensity of "bubbles".  (I'll try to figure out/explain why I feel like this might be the case when I'm awake enough to think straight.)
Investments are not taxed. As an added plus, they also see college as an investment in yourself, so tuition is also not taxed. The idea of bubbles like you mentioned weren't addressed one way or the other. If you can elaborate, it may help me think through it more, but keep in mind I dont' consider myself an expert on it.  I will say this, which may help clear some things up. Right now, the majority of business decisions involve how it will affect them tax wise. When you take that component out of the equation, they are able to make the decisions based more on what is good for the company and their customers than what will avoid the most taxes. That alone would make investing more safe IMHO.

Quote
I know very little about how much money the government receives currently, but 23% seems high in comparison to both what the government currently collects and to what the government actually needs..  Is it correct that a typical household gets taxed about 6% of its paycheck by its employers, an equal amount (6%) by the individual, and then about 7% in sales tax (a total of about 19%)?  If I remembered those numbers correctly, that 23% might need to be adjusted.
The 23% may be adjusted a bit to make sure it is in line with current tax revenues for the year it goes into effect. But keep in mind, you're not paying just the taxes taken from your check right now. You're also paying for all the corporate taxes that are passed down to the consumer. From the farmer that plants the seed, to the store you bought it from, and everywhere in between and beyond are taxes that companies had to pay and in turn build in to the price of their product. All of that is being taken out, so yes, you will see a single tax *listed* higher than you have deducted from your check now and sales tax, because you don't see the taxes imbedded into products today.

Quote
The prebate idea (which seems to work like a negative income tax) seems appealing as a means to help the poor, but it does have a side effect.  Under a system in which a prebate exists, some individuals might find it worthwhile to not work, instead living on prebate checks.  What follows is the question: "Is this drain on the system that results from such people worth the help that the system gives to those who genuinely need it?"  Also, how high could the prebate be before it starts to hurt more than it helps?  How high of a prebate could the country afford?
As I mentioned earlier, the prebate is only equal to the amount of *tax* you would owe if you lived at the poverty line, not the poverty line itself. I don't remember the exact numbers, but I think the book mentioned a single person living alone would only get $100 and some change per month. A family of 4 would get around $450 I think. In either case, no one would be able to live off the prebate alone.

I expect these kinds of questions and I'll answer them as best I can.
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Offline Narei Mooncatt

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Re: Fair Tax now?
« Reply #6 on: June 15, 2010, 12:43:21 am »
@ Cicero

You are right, the middle class are the back bone, but it sounds almost like you're thinking the middle class wouldn't see a tax benefit at all in this. First off, the prices on the shelf will remain about the same. Second, you don't have the taxes taken from your paycheck, giving you more desposible income. Third, you also get the prebate. That benefits everyone. That's the beauty of the proposal. The poor still get the assistance they need, we all get more to spend, and prices will remain the same at the register, and those wealthy that some people seem so eager to tax are now spending more money (and more in taxes) and also more readily willing to invest in the economy so more people are then able to find more productive jobs. Wealthy people have to buy stuff too. Heck, I'd venture to say they buy not only more expensive items, but they buy them more often. Some things they may hold on to, like the real big ticket items (planes, mansions, etc). But others like their cars and other toys they are likely to be replacing more often. I don't know of any rich person driving around in a 20 or even a 10 year old car. No matter how fancy it is.

Right now our tax system punishes people for making the most of their abilities by charging them a higher amount when they make more and trying to invest (normally considered a wise move so you have retirement income, not just to profit). Companies need investment capital to grow and expand. Not only will the corporate tax elimination make us the most competitive tax country to entice companies to move back to the U.S. and create more jobs (helping middle class and even lower class), but people will be more willing to invest in them to make said jobs because they too don't have to worry about the tax hits.
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Offline CiceroKit

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Re: Fair Tax now?
« Reply #7 on: June 15, 2010, 01:08:54 am »
I hear what you are saying, but I am skeptical. I think the fair tax would be better for me, personally, but I don't know that it would be a great improvement for most people. I guess it is hard to say without it being implemented on a federal level. I have been to states that generate all their tax revenue from sales tax, and I have been in states that generate none of their tax revenue from sales tax. The best situation I have seen so far is that of the people who live in New Hampshire (no sales tax or income tax and fairly low property tax rates). The state does tax investment income and business profits a bit higher as well as making good use of vice taxes (mainly tobacco). I am not sure that situation would work for the rest of the country though. I think the tax system in New Hampshire probably only works for that state given the state's demographics. So far, it has been the most attractive option I have seen.
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Re: Fair Tax now?
« Reply #8 on: June 15, 2010, 04:49:35 pm »
Investments are not taxed. As an added plus, they also see college as an investment in yourself, so tuition is also not taxed. The idea of bubbles like you mentioned weren't addressed one way or the other. If you can elaborate, it may help me think through it more, but keep in mind I dont' consider myself an expert on it.  I will say this, which may help clear some things up. Right now, the majority of business decisions involve how it will affect them tax wise. When you take that component out of the equation, they are able to make the decisions based more on what is good for the company and their customers than what will avoid the most taxes. That alone would make investing more safe IMHO.

I see that point, but I'm viewing investment from the paradigm of investors rather than from the paradigm of businesses.

Given the assumption that the fair tax is implemented, I see the following as a possible cause-and-effect chain:

  • It becomes possible to invest money without an additional tax being imposed on such money simply because it is invested.
  • A large number of investors realize this, and thus start investing (or increase the amounts of their investments), hoping to achieve an n% APY on whatever income they set aside.  This in turn increases the proportion of the money supply that is invested, which boosts the economy's ideal performance in comparison to the previous tax system.
  • At some eventual point, the market ceases to perform well.  Accordingly, a proportion of these investors pull their money out to minimize their immediate losses rather than hold their investments until the market stabilizes.  As a consequence, the market starts going through a bust cycle, as it would have done under the previous tax system.
  • Since the number of investors has increased, and since the proportion of investors that would sell stocks in bulk in response to tanking market conditions would not decrease as a consequence of the fair tax (and might increase, considering that the additional investors from the implementation of the fair tax are likely to be made up largely of middle class individuals who are less educated in advanced financial systems than professional investors), a larger proportion of the economy's finances will be pulled from the market in response to poor economic conditions than would be the case for the previous tax system.
  • The ultimate result is an economy that has both higher economic boons and lower economic crashes.

In retrospect, the effect and validity of this argument seems to depend largely on the makeup of the investors who would start investing or would invest more as a consequence of nonexistent investment taxing.  It also occurs to me that the increased economic growth that a fair tax would bring about might counter this boom/bust effect (in other words, the average economic state and worst economic state might improve, even if the economy changes more wildly).

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Offline Narei Mooncatt

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Re: Fair Tax now?
« Reply #9 on: June 15, 2010, 05:36:22 pm »
(*considers applying the label "Self-defeating Debater" to his forehead*)

I wouldn't go that far. You're just trying to look at things at an in depth level instead of just going by what I've said. But I don't know of any large number of middle and lower class making individual investing decisions. That's usually done by people experienced and well to do that like to try new things. Most of your lower class investing I think is done with IRA's, 401k's and other managed plans where the individual doesn't actually make many of the choices. The book didn't address the issue you brought up but I don't think I see that being a problem any more than it is now.
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Offline Lobar

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Re: Fair Tax now?
« Reply #10 on: July 01, 2010, 01:59:25 am »
FairTax strikes me as anything but.  All consumption tax schemes are inherently regressive taxes.

All taxes can be thought of as a tax on your income, its just that some taxes target only a specific portion of your income.  A sales tax is thus an income tax that only taxes the portion of income that is spent.  Moving from an income tax to FairTax is thus the equivalent of moving to a flat tax with the added bonus of being able to write off everything you save or invest.  The more you can afford to save, the less your tax burden is, making it regressive.

A man living paycheck-to-paycheck, who spends everything he makes to survive, takes the full brunt of the tax, and pays a full 23% of his income, since what he makes is equal to what he spends.  Meanwhile, a man who makes $100k a year and manages to invest half that in his house and 401k pays only 11.5% of his total income.  Someone making a whole $1,000,000 in a single year that still manages to spend $250,000 of that (say his daughter's getting married and he goes all out on a princess wedding) is still only going to end up paying 5.75% of that whole million.

The whole idea comes off as an attempt to pull a fast one on the working class.  It's rather shortsighted too, since a system that punishes consumer spending would be a groin kick to the economy.
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Offline Narei Mooncatt

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Re: Fair Tax now?
« Reply #11 on: July 01, 2010, 03:10:53 am »
I think you have some things a bit misunderstood. Lets take the guy living paycheck to paycheck spending the full 23% of his income in taxes (unlikely as all get out, but hypothetically speaking). With that kind of an extreme, it's safe to assume he's living at the poverty line. He would get every cent of that back from the monthly prebate. So in your example, the guy's tax rate would actually be 0%. People living above the poverty line still only get a prebate equal to what the poverty line is for them, regardless of how much they make, spend, and pay in taxes. The more you spend on new goods (safe to assume it means being more wealthy), the less the prebate affects you. For the richest, they'd likely not even notice if they missed cashing a prebate check and also pay in much more in taxes.

Even then, that example still doesn't take into account if someone is buying new or used. The guy in your example isn't likely to buy any new big ticket items and more likely to go to garage sales, craigs list, etc for used items, and buy used cars and houses. So he's not likely to ever spend 23% of his income to begin with, meaning his prebate could actually pay him more than he paid in.

Edit: BTW, that guy that only paid in 5.75% of his million dollar a year salary is still paying in more taxes on that one wedding than the original guy at the poverty line would in 5-10 years. I think your idea of being regressive is a bit scewed. It would be regressive if the tax rate were higher for low income earners than high income earners, but it's the same for everyone. Just like how we don't call our current system progressive because the rich spend more. We call it progressive because the tax rates themselves are higher for higher earners.
« Last Edit: July 01, 2010, 03:30:41 am by Narei Mooncatt »
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Offline Lobar

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Re: Fair Tax now?
« Reply #12 on: July 01, 2010, 03:28:53 am »
Perhaps I oversimplified a bit, but nevertheless, 23% of income spent where income spent is 100% of total income = 23% of total income, before applying other factors, and represents the greatest tax liability possible in the FairTax system.  Prebates and no taxes on secondhand goods will help flatten out the poverty end of the graph, but FairTax still represents a massive shifting of the tax burden away from those that can most afford to pay it onto the middle and lower class.  It only benefits the rich.
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Offline Narei Mooncatt

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Re: Fair Tax now?
« Reply #13 on: July 01, 2010, 09:18:49 am »
You can't say he's paying 23% and leave it at that, neglecting the other parts of the plan. The Fair Tax wouldn't even work without the prebate and the lack of tax on second hand goods. Leaving those two items out either shows a lack of understanding, or a purposeful omision to come up with false results. I'll say it again for the last time, the guy in your example will pay zero net taxes at worst, but is likely to get more back on his prebate than he paid in because he's likely to buy a lot of things used/non-taxed. How is this a bad thing?

I will admit, before I got the book, I was concerned why a prebate was even needed. I figured why not just make the bare necessaties tax free such as food and clothing. Then they explained how people like the uber rich could then also get away with paying little to no taxes by only buying tax free items.  At the same time they also recognized the people on the poverty line wouldn't get the help they need if they paid tax on everything. The prebate takes care of both issues in a very simple way. Tax everything new for everyone, with no favoritism played. Then have the prebate because the Fair Tax planners believed that the bare basics should not be taxed for anyone and allows the poor to get their break. It's a simple form to fill out to establish where your poverty line is and could even be direct deposited to your bank account or give you its own debit type card so you don't even have to worry about cashing a check or waiting in line at a government office. From then on it's automatic, the poor get the help they need, and the rich can't escape the taxes. Throw in the non-taxed second hand goods and the poor get an extra break. The rich could take advantage of that as well, but they have more of the idea of "keeping up with the Jones's" and will tend to buy new over an acceptable used item.
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Offline redyoshi49q

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Re: Fair Tax now?
« Reply #14 on: July 01, 2010, 07:49:54 pm »
There's another thing that I've been thinking about with regards to this tax system.

From what I understand, "retail" goods have a tax applied to them, whereas goods that are not sold as retail (i.e., used to make a good or service possible) are sold tax free.  If this is the case, then there's a somewhat huge loophole in the tax system due to the fact that many goods could qualify as either, depending on their use (for example, sheets for beds are an asset used by hotels to supply their service, but could also be a retail good for homeowners).  One could simply lie about the intended use of goods in order to acquire them tax free.  In a more complicated case, one could create a "business" from personal funds, use business funds to buy "assets" for services that the business only renders to its owner, then use these assets for personal use as a part of the "service".  Such a person would pay taxes for his business's "services", but any goods bought with "investment" money would escape taxation.  From a cursory glance, this seems like a particularly large loophole in league with, if not worse than, the larger of present day tax loopholes.

On a similar vein, putting a 23% tax on a single aspect of the economic cycle also increases the propensity for attempts to evade taxes, as a single act would result in a greater acquisition of funds that would otherwise go to taxes than would be the case if taxes occurred at several phases of the economic cycle (a single act of tax evasion with the present system would evade about 6-7% of the value of the good in question).  Given both the ease and the benefit of evading taxes under this system as it stands, it seems that some system to ensure that taxes are actually paid when they are appropriate is needed.

I also talked about this idea with my dad, and he noted a practical reason why adoption of this tax system might be resisted.  Under this tax system, there is no income tax.  Criminal investigation organizations (police, FBI, etc.) presently use discrepancies between one's income tax records and apparent assets in order to arrest people who spent illegally obtained funds under the crime of income tax evasion (dad cited Al Capone for this phenomenon).  Changing the present tax system to a fair tax system would make this impossible, since there would no longer be an income tax.  My dad, due to a bias from his personal experiences, considers the authority to arrest for poorly done taxes a psychological power/control that the US government likes wielding, and though I disagree with this point, the fact that a means to find and arrest criminals would no longer exist under this tax system still holds and creates an argument to not adopt such a system.  The assertion that this tax system would have a net benefit would also have to counter/compensate for this paradigm, for example, by asserting that the economic benefit gained would be worth the extra crime or by creating a new method to minimize/control/deter crime to compensate for the reduced deterrence of crime.

The more you can afford to save, the less your tax burden is, making it regressive.

If I understand you correctly, you're saying that taxing sales instead of income would lessen the tax impact of expenditures from income obtained by savings (If I misinterpreted, please say so).  I don't think that would be the case.  I'll see if I can illustrate this by a comparison between a 23% sales tax and a 23% income tax.

We'll consider some person Bob who earns $2,000,000.  Bob spends half and saves half.  The half he spends, regardless of whether it's taxes as income or as sales, will be taxed for $230,000 if the tax rate is 23%.  Bob will get $770,000 worth of goods and services after tax.

In the case that there is a 23% income tax, Bob will have a net $770,000 invested.  Let's say that investment rates will double his investment in 9 years.  After nine years, Bob will be able to withdraw $1,540,000.  Since there would be no sales tax in this case, he could buy $1,540,000 worth of goods.  Between now and 9 years from now, Bob spent $2,310,000 after taxes and paid $460,000 in taxes.

Now consider the case that there is a 23% sales tax.  Bob's investment will start at $1,000,000, as his original income wasn't taxed.  In nine years, Bob withdraws $2,000,000, double his original investment, but his money would get taxed as it is spent.  A 23% sales tax means that Bob would get $1,540,000 worth of goods for his money.  Effectively, Bob spends $2,310,000 for goods after taxes and pays a total of $690,000 in taxes.

Note that Bob's net value of goods is the same as the previous case.  This is because taxation before interest and taxation after interest are mathematically equivalent for the individual.  In this simplified case, the only differences between these two tax systems is the fact that the government gets 50% more money in the latter case, but 2/3 of that money comes 9 years later.  Complexities of the real world might create mild differences between the sales tax and the income tax, but they have highly similar impacts.
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Offline Narei Mooncatt

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Re: Fair Tax now?
« Reply #15 on: July 02, 2010, 01:24:22 am »
Redyoshi49q, the fair tax book doesn't address your questions specifically, so I talked to someone who knows a lot about it and was once a financial planner.

RE: Your loophole question and how something bought at retail level for a business is taxed.

Simply put, business to business transactions are not taxed according to the plan. The guy I talked to said a system would have to be put in place to allow business' to be granted tax exempt status when purchasing retail level goods for said business. Going on personal experience, this makes sense and is already employed in many states for state level taxes. The way that works is the business goes into an agreement with a store. I'll use Walmart as an example since I worked there and was involved with some of these transactions. The owner would give Walmart the business' tax ID number to hold on file and get a card indicating the tax exempt status. Any time they made a tax exepmt purchase, the receipt had their tax ID printed on it so there's a record of who and why no tax was paid. They'd likely have something like this on the federal level as well.

Now, this does leave open a possibility of someone buying, say cat food, tax free when they own an auto repair shop. It would be up to the cashier to second guess that purchase, but that's small time stuff even if they didn't question it. Also, if done enough, the feds themselves could start questioning why so many iffy tax free purchases are being made buy a business. Also on the topic of tax evasion, the Fair Tax is expected to make it easier to catch evaders because it's so simple and transparent. The current complex tax code makes it pretty easy to get around paying income taxes through various means. With the Fair Tax, you need two people to try pulling off evasion, and even then will be hard. You need the person buying the goods to have the cooperation of the store to avoid the taxes. And the store would have to find a way to hide that sale's taxes. There's no write off's, deductions, etc to cover up the lack of tax collection or forwarding to the government. As written, the sales price is with the tax included, the current tax rate and amount paid at the point of sale would be listed on the receipt, meaning it would be pretty simple to audit a place and see if they have been collecting enough and forwarding enough to the feds. The Fair Tax planners do agree that some evasion may happen. There will always be a criminal element no matter what system is in place, but they don't see it possible to be wide spread.

RE: Tracking illegal income earners

The guy I spoke with hadn't heard of tacking criminals in the manner you mentioned. He did say that criminals aren't going to be filling out 1040's for their ill gotten gains as it is, so there's no tax collected on them under the current system anyway. Personally I think the police would have other means of tracking people of interest for these crimes, but I digress. The upshot, is those criminals will still be buying goods and services in the public market. So even though they may be hiding where they got their money, they're still paying their share of taxes at the registers when they used to not pay at all for the illegal monies.
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